In re Wachovia Equity Sec. Litig..Stichting Pensioenfonds Abp

• Decision Date: 31 March 2011
• Docket Number: No. 09 Civ. 4473(RJS),No. 09 Civ. 6351(RJS),No. 08 Civ. 6171(RJS),No. 09 Civ. 5466(RJS),08 Civ. 6171(RJS),09 Civ. 4473(RJS),09 Civ. 5466(RJS),09 Civ. 6351(RJS)
• Citation: 753 F.Supp.2d 326
• Parties: In re WACHOVIA EQUITY SECURITIES LITIGATION.Stichting Pensioenfonds ABP, Plaintiff,v.Wachovia Corporation, et al., Defendants.FC Holdings AB, et al., Plaintiffs,v.Wells Fargo & Company, et. al., Defendants.In Re Wachovia Preferred Securities & Bond/Notes Litigation.
• Court: U.S. District Court — Southern District of New York

753 F.Supp.2d 326

In re WACHOVIA EQUITY SECURITIES LITIGATION.Stichting Pensioenfonds ABP, Plaintiff,

v.Wachovia Corporation, et al., Defendants.FC Holdings AB, et al., Plaintiffs,

v.Wells Fargo & Company, et. al., Defendants.In Re Wachovia Preferred Securities & Bond/Notes Litigation.

Nos. 08 Civ. 6171(RJS), 09 Civ. 4473(RJS), 09 Civ. 5466(RJS), 09 Civ. 6351(RJS).

United States District Court, S.D. New York.

March 31, 2011.

Ira M. Press, Andrew Martin McNeela, Roger W. Kirby, Kirby McInerney LLP, New York, NY, for The Equity Plaintiffs.Geoffrey Coyle Jarvis, Jay W. Eisenhofer, Michele S. Carino, Grant & Eisenhofer, P.A., New York, NY, James Richard Banko, Grant & Eisenhofer, PA, Wilmington, DE, for The Stichting Plaintiffs.Daniel Arthur Cohen, Daniel Joseph Kornstein, Amy Christine Gross, Kornstein Veisz Wexler & Pollard, LLP, Paul D. Wexler, Bragar, Wexler & Eagel, P.C., New York, NY, Jeffrey H. Squire, Bracewell & Patterson, LLP, Washington, DC, for The FC Holdings Plaintiffs.John J. Gross, Christopher L. Nelson, David Kessler, John Anthony Kehoe, Benjamin J. Sweet, Barroway Topaz Kessler Meltzer & Check, LLP, Radnor, PA, Nichole Browning, Donald Peterson, Barroway Topaz Kessler Meltzer & Check, LLP, San Francisco, CA, Ramzi Abadou, Maureen Elizabeth Mueller, Lucas F. Olts, John J. Rice, Robbins Geller Rudman & Dowd LLP, San Diego, CA, David Avi Rosenfeld, Robbins Geller Rudman & Dowd LLP, Melville, NY, John Patrick Coffey, William Curtis Fredericks, Kurt Michael Hinciker, Christopher Chad Johnson, John James Rizio–Hamilton, Jeroen Van Kwawegen, Bernstein Litowitz Berger & Grossmann LLP, Jack Gerald Fruchter, Abraham Fruchter & Twersky LLP, Michael Max Goldberg, Law Offices of Michael Goldberg, Marc Ian Gross, Fei–Lu Qian, Pomerantz Haudek Block Grossman & Gross LLP, New York, NY, Lionel Z. Glancy, Glancy & Binkow, LLP, Los Angeles, CA, for The Bond/Notes Plaintiffs.Douglas H. Flaum, Eric A. Hirsch, Israel David, John W. Brewer, Fried, Frank, Harris, Shriver & Jacobson, New York, NY, for The Wachovia Defendants.Alfred Robert Pietrzak, Patrick Michael McGuirk, Owen Harris Smith, Saima S. Ahmed, Sidley Austin LLP, New York, NY, for The Underwriter Defendants.Emmet Thomas Flood, Williams & Connolly LLP, Washington, DC, Marshall Beil, McGuireWoods LLP, New York, NY, for Defendant KPMG.

OPINION AND ORDER

RICHARD J. SULLIVAN, District Judge.

In these related actions, Plaintiffs bring a panoply of claims under the Securities Act of 1933 (the “Securities Act”) and the Securities Exchange Act of 1934 (the “Exchange Act”) against Defendant Wachovia Corporation (“Wachovia”) and a variety of related entities and individuals. All claims arise from the financial disintegration Wachovia experienced between its 2006 purchase of Golden West Financial Corporation and its 2008 merger with Wells Fargo & Company. Now before the Court are no fewer than seven motions to dismiss four complaints. For the reasons stated herein, those motions are granted in part and denied in part.

I. Background

A. Facts ¹

The four complaints at issue span a grand total of 605 pages and 1,814 paragraphs.² Although the following recitation of facts provides only a bird's-eye view of the litigation, the Court will delve into the details of the pleadings as necessary to resolve particular legal challenges.

1. Overview

The relevant narrative begins in 2006, when Wachovia was one of the country's largest financial services providers, with a market capitalization of $112 billion. (Eq. Compl. ¶ 4.) As a bank holding company, Wachovia engaged in capital management, general banking, and investment banking ( id. ¶ 61), and maintained retail banking offices in 21 states ( id. ¶ 33).

On October 1, 2006, Wachovia completed its acquisition of Golden West Financial Corporation (“Golden West”), an Oakland-based mortgage lender, for more than $24 billion.³ ( Id. ¶¶ 5, 62.) Prior to the Golden West acquisition, a majority of the loans funded by Wachovia were traditional fixed-rate mortgages. ( Id. ¶ 80.) Golden West's main product, however, was a payment option adjustable rate mortgage (“Option ARM”) known as the Pick–A–Payment (“Pick–A–Pay”) mortgage, which allowed borrowers to choose from multiple payment options each month. ( Id. ¶ 5.) Among those options was a “minimum” payment that, because it did not cover the monthly interest, actually increased the principal of the loan—a phenomenon known as “negative amortization.” ( Id. ¶ 6.)

Plaintiffs allege that following the Golden West acquisition, Wachovia began to focus on selling Pick–A–Pay loans rather than the traditional loans that had previously comprised the bulk of its residential mortgage business. ( Id. ¶ 85.) Plaintiffs further allege that Wachovia weakened the credit quality of the Pick–A–Pay portfolio by lowering minimum credit scores ( id. ¶ 97), failing to verify borrower income levels ( id. ¶ 113), implementing quotas and sales incentives for loan officers ( id. ¶ 125), and relying on inflated third-party appraisals of home value ( id. ¶ 142). According to Plaintiffs, Wachovia adopted debased underwriting standards and aggressive marketing strategies in order to maximize Pick–A–Pay loan volume “at all costs.” ( Id. ¶ 137; see id. ¶ 85.)

2. Alleged Misrepresentations

Plaintiffs collectively identify allegedly false and misleading statements made by Wachovia on 24 separate occasions. In the interest of brevity, the Court will summarize a representative sampling of these statements.

On a May 8, 2006 conference call announcing the Golden West acquisition, Defendant G. Kennedy Thompson (“Thompson”), the President and CEO of Wachovia, indicated that Golden West was “obsessed with conservative underwriting,” had “no subprime origination,” and maintained a “very conservative portfolio.” ( Id. ¶ 169.) On an April 16, 2007 call, Thompson similarly touted the “superior credit quality” of Wachovia's mortgage portfolio. ( Id. ¶ 190.) “It would be ha[r]d for me to imagine,” Thompson said, “how anybody could look at our underwriting of these loans and draw any conclusion ... other than [that] we are very responsible underwriters.” ( Id. ¶ 194.)

As the housing market continued to decline, Defendants allegedly misrepresented the comparative advantages of the Pick–A–Pay mortgage relative to the troubled subprime market. On a July 20, 2007 conference call, Defendant Donald K. Truslow (“Truslow”), Wachovia's Chief Risk Officer, stated that “we've actively managed our business to minimize our exposure to the subprime market. So as a result there's been little impact to our businesses with the turbulence in the subprime markets....” ( Id. ¶ 205.) On a January 22, 2008 earnings call, Defendant Thomas J. Wurtz (“Wurtz”), Wachovia's Chief Financial Officer, referred to a series of charts comparing the Pick–A–Pay portfolio with prime, subprime, and Alt–A industry performance.⁴ Wurtz concluded that “[t]here is clear evidence that our Pick–A–Pay portfolio is, to date, performing very similar to the average prime portfolio in the industry....” ( Id. ¶ 241.)

Plaintiffs separately allege that during 2006 and 2007, Wachovia created, structured, and underwrote approximately $10.11 billion of collateralized debt obligations (“CDOs”) backed by pools of subprime mortgages.⁵ ( Id. ¶ 164.) Until November 9, 2007, however, Wachovia allegedly concealed that it had retained more than $2.1 billion of those CDOs. ( Id.) Wachovia carried these CDOs at par value until October 19, 2007, despite the fact that their value was allegedly impaired no later than February 2007. ( Id.)

3. The Crash

According to the pleadings, the true “risks and realities” of the Pick–A–Pay portfolio began to seep out in early 2008. ( Id. ¶ 286; see id. ¶¶ 287–88.) In an April 14, 2008 conference call, Wachovia disclosed for the first time that 14% of the $120 billion Pick–A–Pay portfolio had loan-to-value (LTV) ratios above 100%.⁶ ( Id. ¶ 287.) Defendants simultaneously admitted that due to Pick–A–Pay losses, Wachovia would need to raise billions in new capital and could not afford to continue its dividend payout. ( Id. ¶ 282.) Thompson was forced to resign as CEO on June 2, 2008. ( Id. ¶ 24.) The new CEO, Lanty Smith, later admitted to investors that “there has been a complete recognition at the Board level that Golden West was a mistake and that we have to deal with the consequences of it.” ( Id. ¶ 25.)

By late September 2008, Wachovia's share price fell below $1 per share for a market capitalization loss of approximately $109.8 billion from early 2007. ( Id.) Following a proposed acquisition by Citigroup, Wachovia subsequently merged with Wells Fargo in a $12.7 billion transaction—less than Wachovia had originally paid for Golden West. (Stichting Compl. ¶¶ 22–23.)

B. Procedural History

This opinion resolves pending motions to dismiss four distinct complaints: In re Wachovia Equity Securities Litigation, No. 08 Civ. 6171; In re Wachovia Preferred Securities and Bond/Notes Litigation, No. 09 Civ. 6351; Stichting Pensioenfonds ABP v. Wachovia Corporation, No. 09 Civ. 4473; and FC Holdings AB v. Wells Fargo & Co., No. 09 Civ. 5466. The Bond/Notes case includes a total of four consolidated cases, and the Stichting case includes a total of three consolidated cases.

1. In re Wachovia Equity Securities Litigation

The first relevant case is a putative class action originally captioned Lipetz v. Wachovia Corporation, No. 08 Civ. 6171, and filed on July 7, 2008. By Order dated October 14, 2008, the Court appointed New York City Pension Funds as Lead Plaintiff and the law firm of Kirby McInerney LLP as lead counsel. Lead Plaintiff filed an Amended Complaint on December 15, 2008 and a Second Amended Complaint (the “ Equity Complaint ”) on May 28, 2010.

The Equity Complaint asserts claims under Section 10(b) of the Exchange Act and Rule 10b–5, promulgated thereunder; Section 20(b) of the Exchange Act; Section 11 of the Securities Act; Section 15 of the Securities...